SUNAMERICA TO BANKROLL SHOP BUYOUTS: LOAN PAYBACKS WAIVED IN RETURN FOR SALES TARGETS

Insurers are finding independent financial advisers more important than ever: Now SunAmerica Inc. is ready to start bankrolling the sale of financial planning shops to buyers who agree to hawk their wares.

Executives of the Los Angeles company expect to unveil the program at its broker-dealer affiliates’ national sales meetings, which begin next month.

Senior vice president Gary Krat dropped hints about the program, which follows the lead of Financial Network Investment Corp., at an April 30 meeting of brokers in New York. While Mr. Krat will not comment on specifics, two recent transactions could serve as its template.

In March, the company’s Phoenix-based SunAmerica Securities Inc. unit helped Michael Conlon finance the purchase of two financial planner practices in Wisconsin. Together, Financial Management Strategies Inc. of Appleton and C.J. Schmidt Advisory Services Inc. of Green Bay supervise $110 million and generate $1.1 million in annual commissions and advisory fees.

Mr. Conlon, 34, who sold his Appleton brokerage to Jackson National Life Insurance Co. early last year, says SunAmerica arranged a five-year, below-market-rate loan — half of which is forgivable if he meets minimum sales targets of SunAmerica products and services.

“It allowed me to obtain majority control right away because I was able to give the sellers a large portion of money up front,” says Mr. Conlon.

Last month, SunAmerica assisted Phoenix-based Householder Group with legal, accounting and M&A experts in its acquisition of Kavesh & Gau Inc. of Torrance, Calif., SunAmerica’s biggest commission producing independent planner — overseeing more than $550 million.

a helping hand

“SunAmerica believes we have the capability of building this into a very successful model,” says Scott Householder, 41, who left American Express Financial Advisors in 1995 to launch an independent advisory company that now supervises $500 million. “They helped us with some of the due diligence to make sure it was a sound business decision.”

Assisting aging reps wanting “to equitize or monetize the value in their business is among the highest and best uses of our time,” says Mr. Krat, who also serves as chairman and CEO of SunAmerica Financial Network.

Last year, this sales system generated nearly one-third of SunAmerica’s $3.7 billion in annuity sales. It includes Royal Alliance Associates Inc., SunAmerica Securities Inc., Advantage Capital Corp., FSC Securities Corp., Sentra Securities Corp. and Spelman & Co., as well as 9,700 independent advisers who clear transactions through the six brokerage units.

Of course, SunAmerica’s motives aren’t wholly altruistic.

As national and regional brokerages are limiting the number of houses whose products they will sell, SunAmerica, Fnic — a unit of insurer Aetna Inc. — and other sellers are at risk of losing relationships with much-wooed independent advisers. Suitors include consolidators like Leon Black’s National Financial Partners, accounting chains like H&R Block Group Inc., competing broker dealers and even other independent advisers.

In addition, many financial planners are ready to retire. Two years ago, the International Association for Financial Planning found that 30% of its members were contemplating retirement within five years.

This impending transition has already prompted competitors like American Express and LPL Financial Services to help match up prospective buyers and sellers. Other brokerage groups are studying similar initiatives. Mutual Service Corp. of West Palm Beach, Fla., and Associated Securities Corp. in Los Angeles have each launched initiatives to develop so-called continuity plans.

“SunAmerica wants to help their reps go through an orderly transition and help them build more profitable, larger practices,” says Mark Tibergien of Moss-Adams LLP, a Seattle accountancy and advisory firm that is working with SunAmerica and Fnic.

“They are examining ways in which they can provide financing for a portion of the purchase price,” he continues. “What is not yet clear is whether that will be done by a master arrangement that the company has negotiated with a bank or whether SunAmerica will provide the financing.”

Most financial advisory firm sales are structured under earn-out agreements in which the buyer pays an agreed price over, say, four years, if the business continues generating a specified level of fees.

The SunAmerica and Fnic programs are aimed at making such sales more attractive by helping buyers offer more upfront cash or shorten the earn-out period in exchange for maintaining the broker-dealer relationship.

“There is no question that it helps retain the business inside the broker dealer, so from that perspective it’s a good business opportunity for us,” says Mr. Krat. “We were a capital-rich organization when we were SunAmerica, and we have an even greater capital base now that we are owned by AIG,” he adds, referring to SunAmerica’s sale to New York’s American International Group Inc. in January.

“For sellers it’s a compelling arrangement, says Mr. Tibergien, noting that trail fees — continuing commissions on assets under supervision — remain a background force in any deal. “Sales break down when an owner questions why they should sell their practice for an earn-out when they could make just as much money by letting their business diminish over time and collecting the trails.”

But the success of these programs will ultimately depend on how well they play to advisers.

Miles Gordon, president of Fnic, says no advisers have taken the company up on its financing program since its official rollout a month ago. The Torrance-based company earlier had assisted in the sale of two affiliated practices.

“There are strong defensive elements to these programs,” says Mr. Tibergien, “but they have to make business sense. Brokers can put themselves in front of this trend or find themselves behind it.”